Health care costs are going to sting more

Health care costs are likely to put more stress on the family budget during the next decade.

The amount of money Americans spend on health care is likely to rise by about 5.5% per year for the next several years, according to new government projections on health spending through 2026. Spending on health will most likely rise by considerably more than inflation or GDP growth, which means it will increasingly strain both the federal budget and the personal finances of millions of Americans.

Health spending actually moderated for several years following the 2007 – 2009 recession, averaging an increase of 3.8% per year from 2008 to 2013. In the private insurance market, spending per person rose just 1.7% in 2012 and 2.1% in 2013. Those were among the lowest increases in health spending on record. The recession explains most of that, since people spend less on health care when money is tight, especially if they lose their job and the insurance that goes with it.

That respite appears to be over. The latest numbers, published by the Centers for Medicare and Medicaid Services, show that spending rose by 5% per year from 2014 through 2016, the last year for which data is available. Health spending should rise by 5.3% in 2018, with average increases of 5.7% per year from 2021 through 2026, according to the forecast.

Several factors account for the disproportionate rise in health spending. The U.S. population is aging, and older people require more care. The population is also growing, another factor leading to more use of health care overall. And health care inflation is typically higher than overall inflation, which pushes costs up.

The Affordable Care Act, which went into effect in 2014, has been intensely controversial — but it hasn’t had as much effect on health care costs as its strongest supporters and detractors tend to think. It did push overall spending up, simply because more people were able to get health insurance, and access to care. It may have lowered costs in one part of Medicare, because of required changes there. On the whole, other forces seem to have more of an impact on spending.

The biggest effect of the ACA, in terms of cost, has probably been on people who buy insurance themselves, because they’re not covered by an employer, and earn too much to qualify for subsidies under the ACA. Insurers face limits on raising premiums and out-of-pocket expenses in most parts of the market, but have more freedom to raise prices on people buying individual policies, as Yahoo Finance and other news organizations have documented.

Spending increases in the individual insurance market have vastly outpaced the rest of the industry, with spending among this group rising an estimated 18.4% per enrollee in 2017, according to the CMS research, and 11.3% per enrollee the year before. If there’s any good news, it’s that spending hikes in the individual insurance market should settle at around 5% per year, per person, in the near future.

The need to address increasing costs

Health care spending accounts for an increasing portion of both the typical family budget and Washington’s annual outlays. The typical family spent 5.1% of its after-tax income on health care in 1990. That’s now up to 7.2%. At the federal level, spending on health care (mostly Medicare and Medicaid) has risen from 14.4% of all federal outlays in 1990 to about 31% today — one of the main reasons the national debt is $21 trillion, and swelling rapidly.

Congress has fought some pitched battles over health care recently, with President Donald Trump and his fellow Republicans trying and failing three times to repeal the ACA last year. As part of the tax bill signed in December, Congress did repeal the individual mandate requiring every American to have insurance. But that won’t do anything to lower costs for most people, except for those who choose to forego coverage — and then, only as long as they don’t get sick or injured and have to pay big medical bills out of pocket.

There are many ideas for how to tackle health care costs, such as changing incentives to reward providers that offer the best outcomes for the lowest prices, instead of rewarding them for providing the most care. The Affordable Care Act — arguably, misnamed — didn’t focus on costs as much as it did on extending coverage to those who didn’t have it. So, when Congress passed the ACA in 2010, it left a big part of the job unfinished. Many budget experts say the explosion in medical costs will cause a fiscal crisis someday, as the government’s debt becomes too large to finance affordably. For many families, that has already happened.